The Relationship Between Net Premium Written and Policyholders' Surplus

Property-liability insurance company financial strength is important to the purchasers of the insurance product as well as to company stockholders, for this strength protects insureds against any possible company defaults. Because of this unusual buyer caveat, there are advantages to developing some generally applicable measures of insurance company strength. To meet this need, Roger Kenney’ developed two of these measures approximately forty years ago. At that time insurance law did not permit multiple line companies, ‘and consequently Kenney devised two measures, one for fire insurers and another for casualty insurers. For fire insurers the standard test was a one-to-one relationship between the unearned premium reserve and policyholders’ surplus, i.e., total assets less total liabilities (this is the statutory definition of policyholders’ surplus). For casualty insurers the standard test was a two-to-one relationship between net premium written and policyholders’ surplus. When insurers were allowed to write both property and casualty business, the Kenney tests were maintained and applied separately after an allocation (based on premium) of surplus to distinct property and casualty “surplus accounts.”